Encouraging Savings at Tax Time

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NCSL Contact:
Qiana Torres Flores
NCSL Denver- 303-364-7700

By Qiana Torres Flores
Updated October 2011

Saving money for future emergencies can be difficult. Research shows that 25 percent of Americans have no savings and an estimated 25 percent of adults do not have or rarely use a bank account.1 One way people can save is to commit part of their federal tax refund to a savings account or U.S. savings bond. Many taxpayers, however, are unaware of these options.

More than $300 billion is refunded to taxpayers annually. For some families, their refund may be the largest lump sum they receive all year.2 The option to deposit federal tax refunds directly into as many as three different accounts was introduced by the Internal Revenue Service (IRS) in tax season 2007. In 2010, the IRS allowed taxpayers to buy inflation-protected U.S. savings bonds with their federal tax refunds. These policies make it possible for people to save at tax time by directly depositing part of a federal tax refund into a savings account or buying a U.S. savings bond.

The Doorways to Dreams Fund (D2D), a nonprofit organization that develops financial products and policies that appeal to and serve low-income families, first came up with the split deposits and savings bond ideas for tax refunds. D2D conducted pilot projects on these policies and found that people, including those who were not previously in the habit of setting money aside, chose to save. D2D collaborated with the U.S. Treasury Department and the IRS to establish these options at the federal level.

Three states, as well, have enacted legislation allowing state tax refunds to be directly deposited into several accounts.

Split Refunds

D2D tested the split refund option in seven states during the 2004 to 2006 tax seasons. People who received a federal tax refund could deposit it in up to three accounts including checking, savings and retirement. About 20 percent of all refund recipients saved part of their refunds, and about 75 percent of them reported that they had no prior savings.After being presented with the results of the pilot, the IRS introduced Form 8888 in 2007 to provide this direct deposit option. The IRS estimated that 385,882 refund recipients chose to split their refunds in 2010, saving a total of $1.7 billion.4

Savings Bonds

D2D, along with Volunteer Income Tax Assistance (VITA) sites and select H&R Block offices, next tested the U.S. savings bonds refund option in 19 states, between 2007 and 2010. Fifty-two percent of those who purchased bonds had no savings at all, and 41 percent had never before saved a part of their refunds.D2D worked with the U.S. Treasury, the IRS and the Bureau of Public Debt to allow the savings bond refund option at the federal level. The IRS revised Form 8888 to add the savings bond option for the 2010 filing season, and in 2011, it added the option to buy bonds with co-owners (as gifts).

Bond buyers may purchase between $50 and $5,000 of Series I Bonds, and need not have a bank account. Bonds are protected against inflation and pay interest for 30 years, but are redeemable after one year. Bonds can be purchased as gifts and when redeemed, can be used for any purpose. D2D reports that early data indicate more than 70 percent of those who purchased savings bonds during tax time in 2011 had a household income below the national median of $50,738.6

State Action

Lawmakers in California, Hawaii and Maryland have passed legislation to allow taxpayers to split their refunds between several accounts.California lawmakers have also considered allowing filers to purchase savings bonds with their state refunds, but so far have not passed legislation to do so. Maryland’s split refund option will begin in tax year 2012. Delegate John Olszewski, Jr. sponsored the Maryland bill and is working with the state chief financial officer to launch an awareness campaign this year to let tax filers know about this new opportunity. NCSL has been unable to collect data on the status of split refunds in California and Hawaii.

Getting the Word Out

Constituents may be interested in knowing about these opportunities to save. The IRS and the Doorways to Dreams Fund provide information and free customizable newsletter templates, posters, brochures and other marketing materials for tax preparers and community leaders to spread the word about the availability of these options. You may also contact NCSL for more information.

Below are links to outreach resources from the IRS and D2D.


1. Federal Deposit Insurance Corporation, “FDIC National Survey of Unbanked and Underbanked Households,” (2009)

2. Tim Flacke, “Innovations in Saving Implications for State Policy,” National Conference of State Legislatures” (presentation at the Opportunities for Working Families Leadership Forum for State Lawmakers), Denver, Colo., June 2011: 3. Peter Tufano, Daniel Schneider, and Sondra Beverly. “Leveraging Tax Refunds to Encourage Savings,” (2005)

4. Doorways to Dreams Fund, “Split Refunds: A Unique Savings Opportunity,” (Accessed 2011): 
    Internal Revenue Services, “IRS Expands Taxpayers’ Options for Direct Deposit of Refunds,” (2006)

5. Doorways to Dreams Fund, “Awareness Materials - Tax Payers and Savings Bonds: Notable Facts,” (2011)

6. Doorways to Dreams Fund, “2010 Savings Bond D2D Report,” (2010)
    U.S. Census Bureau, “State Median Income,” (2010)

7. California AB 2439 (2006)
    California AB 1693 (2007)
    Hawaii SB 2838 (2008)
    Maryland HB 883/SB 698 (2009) 
    Delegate John Olszewski, email, Oct. 6, 2011.
    Doorways to Dreams, “Build Savings at Tax Time: A Guide to Split Refunds,” (2006)